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Cabela's Inc (CAB) presents a trading opportunity that offers a 4.06% return in just 122 days. A covered call on Cabelas at the $50.00 level expiring on Jun. '15 offers an assigned return rate of 4.06% or 12.14% annualized. This trade offers...

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were slipping 8.6% to $50.21 Thursday after the sporting goods retailer missed analysts' estimates for earnings in the fourth quarter.
Cabela's reported earnings of $1.11 a share for the fourth...

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Cabela's is the world's largest retailer of outdoors merchandise. The sporting goods outfitter sells hunting, fishing and camping equipment and apparel. Cabela's operates 28 retail stores in the United States and Canada as well as major direct-to-consumer operations through its catalog and over the Internet. In 2007, Cabela's expanded into the Canadian retail market by acqiring S.I.R. Warehouse Sports Store, ending the year with one location in Winnipeg, Manitoba.[1] The company also opened 8 new stores in the U.S. during 2007, and at year end Cabela's retail square footage had grown to 4.0 million.[2]

Cabela's total revenue increased 14% in 2007 to over $2.3 billion.[3] Comparable store sales fell 1.2% as tough economic conditions (U.S. real GDP grew only 2.2% during the year) discouraged customers from traveling to Cabela's.[4][5] This trend has continued through the first quarter of fiscal 2008 as comparable store sales fell 8.4% in the quarter as real GDP grew at a 1.0% annual rate in the first quarter; however Cabela's managed to increase total revenue and operating income during the quarter despite falling same store sales.[6][7]

As most of Cabela's stores are located outside major metropolitan areas in the Midwest, there are still several parts of the country where the company sees opportunities for expansion, particularly in the West and Southeast regions.[8] Cabela's also continues to grow its direct marketing business, circulating 140 million catalogs in 2007, up from 135 million in 2006, and maintaining its position as the most visited sporting goods e-commerce website.[9][10] A major trend in retail is the growth of private labels as retailers earn higher margins on their own branded products; Cabela's is heavily invested in the private label trend as approximately 35% of Cabela's merchandise sales in 2007 were from Cabela's own branded merchandise.[11]

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The entrance to a Cabela's store in Lacey, WA

Business Overview

Cabela's is a direct marketer and retailer of outdoor sporting equipment. The company was founded in Nebraska in 1961 as a direct-mail operation, selling fishing equipment. Since then Cabela's has grown into a multi-channel retailer of a wide variety of outdoors equipment and apparel, with over $2.3 billion in revenue in 2007.[12] Cabela's sells merchandise through its catalog mailings and e-commerce operations as well as its 28 retail locations in the U.S. and Canada. Cabela's stores are located outside of major metropolitan areas and include entertainment and educational experiences such as aquariums, dioramas, indoor archery ranges and other features that make Cabela's a type of destination shopping, as customers often travel long distances to spend several hours shopping and exploring the store.

Cabela's has a five-year CAGR of over 11% as total revenue has increased by nearly $1 billion from $1.3 billion in 2003 to $2.3 billion in 2007.[13] In 2007 total revenue increased 14%, driven by a 27% growth in retail merchandise sales, as retail sales have become a larger proportion of total revenue as Cabela's continues to open new store locations.[14] Cabela's earned a 41% gross margin and a 6.4% operating margin on its $2.3 billion of revenue in 2007.[15]

Cabela's has increased revenue, gross and operating profit every year since 2003.[16]

Cabela's Retail Segment grew as a proportion of sales from 40% to 44% in 2007[17]

Business Segments

Direct (48 % of Total Revenue, 53% of Total Segment Operating Income)

Hunting Equipment and Clothing Footwear are Cabela's top categories, although Hunting Equipment sells better in Retail stores while the Clothing and Footwear category sells more strongly in Cabela's Direct channel.[18]

Cabela's started as a direct-mail operation and its direct-to-consumer business is still its largest source of revenue. Cabela's circulated over 140 million catalogs in the U.S. and internationally in 2007, although its catalog sales are being replaced rapidly by sales placed on its e-commerce site, which was the most visited sporting goods e-commerce site in 2007. Cabela's direct business is growing more slowly than its retail business, with revenue increasing only 3.9% to $1.13 billion in 2007.[19] However the Direct business is more profitable than the Retail segment, with a 16.8% segment operating margin in 2007.[20]

Retail (44%, 36%)

Cabela's creates a strong bond between its stores and customers by providing a unique experience with aquariums, diormas, horse corrals and archery ranges within their stores. Customers consider Cabela's stores to be more than retail outlets, but rather they consider Cabela's a destination for entertainment and education and will travel several hours to spend entire days or afternoons at a Cabela's. In 2007 Cabela's opened 8 new store locations for a year-end total of 27 retail stores. With 4.0 million square footage of retail space at the end of 2007, Cabela's stores boast an average of approximately 148,000 square feet.[21] Revenue from Cabela's retail store increased 27% to $1.04 billion in 2007.[22] The Retail segment was Cabela's least profitable operating segment with a still respectable 12.2% operating margin in 2007.[23]

Financial Services (7%, 11%)

Through World's Foremost Bank, a wholly owned subsidiary, Cabela's issues the Cabela's CLUB Visa credit card which is connected to Cabela's customer loyalty rewards program. Over 26% of merchandise sales at Cabela's in 2007 were paid for with a Cabela's CLUB card, which signifies the high level of brand loyalty customers have to Cabela's. The financial services segment contributed over $159 million of revenue and $37 million of operating income to Cabela's total financial performance in 2007, as it was Cabela's most profitable segment with a 23.5% operating margin.[24][25]

Trends and Forces

Untapped Markets in North America

Canada

In 2007, Cabela's acquired S.I.R. Warehouse Sports Store, a leading Canadian outdoors equipment retailer. Through the acquisition, Cabela's gained S.I.R.'s mail-order operation and its 44,000 square foot retail store in Winnipeg, Manitoba.[26] The Winnipeg store will serve as Cabela's Canadian headquarters as the Nebraska-based retailer expands into Canada. Cabela's served Canadian customers through its direct-to-consumer business before the acquisition and the Cabela's brand is already established in the Great White North, where outdoors activities such as hunting, fishing and camping are highly popular. Cabela's is also planning for the opening of its first Cabela's-branded store in Canada in Montreal.

U.S.

The majority of Cabela's retail stores are located in the Midwest region of the United States and customers in other parts of the country rely upon Cabela's catalogs and e-commerce website to buy outdoors equipment and apparel from the retailer. Cabela's has begun to expand its retail locations throughout the U.S. with a handful of stores in Maine, Texas, Louisiana and Nevada. However, there are no Cabela's in the bulk of the Southeast and West regions of the United States. As a hotbed of hunting, camping and fishing, Cabela's absence from states such as Virginia (home to the NRA headquarters and the National Gun Museum), North Carolina, Georgia, Kentucky and Tennessee is notable and stores in these regions could become very successful.

Cabela's retail stores are destinations for shoppers, who often have to drive several hours to reach a location and spend several hours exploring all Cabela's stores have to offer. This type of shopping benefits Cabela's because it generates customer loyalty (not to mention higher sales, because customers buy more when they are in the store longer). However this type of destination shopping suffers during times of economic hardship because consumers cut back on non-necessity spending on entertainment. This effect can be multiplied by rising oil prices which increase the costs of traveling to a Cabela's store. As the domestic economy has struggled and gasoline prices are well above $4.00 per gallon in most of the country, Cabela's stores have suffered as a result. In 2007, when the economy began to stagnate, Cabela's comparable store sales fell 1.3%, and as the economic conditions have worsened in 2008 Cabela's comparable store sales fell 8.4% in the first quarter.[27] Cabela's has partially counteracted this effect by opening stores in markets which draw from new customer bases. Cabela's Direct channels also slipped in 2008, falling 0.6% in the first quarter.[28]

Cabela's own brand of products represented 35% of total merchandise revenue in 2007. This is considerably higher than the penetration of private label goods at other retailers (private label sales accounted for only 14% of revenue at Dick's Sporting Goods in 2007). The popularity of Cabela's private brand leads to higher gross profitability for Cabela's as margins on private label products are typically much larger than margins on branded merchandise. Additionally, this popularity signifies a high-level of loyalty and trust to the Cabela's brand name which translates to loyal customer behavior and repeat purchases at Cabela's.

Competition

Cabela's is the world's largest specialty retailer of outdoors equipment and related apparel, topping $2.3 billion in total revenue in 2007. The majority of Cabela's competition comes from individual specialty hunting, fishing and camping shops. However, Cabela's also faces competition from a number of larger retail chains:

Outdoors Specialty Retailers:
These chains specialize in different areas of the outdoors experience, whether it's fishing, hunting, camping or outfitting and apparel.

Mass Merchandisers and Discount Stores:
Big box retailers such as Wal-Mart Stores (WMT) typically include an outdoors area which offers a limited selection of equipment for camping, fishing and other outdoors activities.